April 29, 2008

The Oil Bull

The price of gasoline is beginning to be a pain in my butt. I'm paying $4.17/gallon and I'm commuting 120 miles every day in a car that gets 17 miles per gallon. I'm not freaking out, but I'm beginning to shop smarter for gas. I hate it when life makes me scrimp, but that's just me. So how long am I going to have to deal with this? Where is the silver lining? Well, here's a theory that I like:

But what happens if a global recession drops demand by 5%? Then prices can fall in half or even more, as they did in 1999. Note that the Asian Contagion recession was limited in global terms; the world's largest economies, the U.S. and Europe, were growing robustly even as southeast Asian economies suffered currency and credit contractions.

Even this limited downturn caused oil to drop from over $35/barrel to under $15/barrel. That begs the question: what would happen to oil prices if the major global economies actually shrink rather than grow?

I know, I know, recessions have been officially banned by the Federal Reserve and the other central banks. Uh, right. But let's say the Fed can't stop the U.S. sliding into recession, and the rest of the world declines behind it.

The whole thing sounds a bit hinky to me - a little wishful thinking thrown in for good measure. However, this is not the first time I've heard this theory. The other time? Just last week, listening to Richard A. Muller.

Muller certainly understands that the bulk of the uptick in the price of oil has everything to do with demand in Asia, China & India specifically. So what happens if China has a civil war? I happen to be one of those people who believes that China will have a civil war as their rich get richer and their middle-class inevitably connects with the rest of the world. China is still largely functionally illiterate. But my point is that a lot of things can and probably will go wrong in China. Their economy cannot sustain its current rate of growth. I think they're going to throw a piston. When that happens, watch out.

Aside from that, if we are to have a global recession, Americans will not starve. We'll just forgo some of our back-to-school and Christmas shopping, have another school shooting and buy more weed. But nobody's going to starve. If that's the total cost of kicking off a global recession that lowers the price of gasoline, I think a lot of Americans would be on board.

The other side of this though, is money that is being (or not being) sunken into the extraction of oil from shale. So is the smart money in Canada or not? That's the question, and it's tied to stuff way beyond the horizon. I think there are a number of oil bears who are having a field day as their Peak Oil Scenario is psychologically gaining traction because of woes at the pump, but oil bulls, we haven't heard from.

In the long term, I think it is much more likely that some economic or war event will affect the demand for oil long before the Peak Oil doomsday scenario plays itself out. Last month, demand for gasoline decreased 3% in the US. I sure as hell ain't gonna be driving 120 miles a day much longer.

Comments

The Oil Bull

The price of gasoline is beginning to be a pain in my butt. I'm paying $4.17/gallon and I'm commuting 120 miles every day in a car that gets 17 miles per gallon. I'm not freaking out, but I'm beginning to shop smarter for gas. I hate it when life makes me scrimp, but that's just me. So how long am I going to have to deal with this? Where is the silver lining? Well, here's a theory that I like:

But what happens if a global recession drops demand by 5%? Then prices can fall in half or even more, as they did in 1999. Note that the Asian Contagion recession was limited in global terms; the world's largest economies, the U.S. and Europe, were growing robustly even as southeast Asian economies suffered currency and credit contractions.

Even this limited downturn caused oil to drop from over $35/barrel to under $15/barrel. That begs the question: what would happen to oil prices if the major global economies actually shrink rather than grow?

I know, I know, recessions have been officially banned by the Federal Reserve and the other central banks. Uh, right. But let's say the Fed can't stop the U.S. sliding into recession, and the rest of the world declines behind it.

The whole thing sounds a bit hinky to me - a little wishful thinking thrown in for good measure. However, this is not the first time I've heard this theory. The other time? Just last week, listening to Richard A. Muller.

Muller certainly understands that the bulk of the uptick in the price of oil has everything to do with demand in Asia, China & India specifically. So what happens if China has a civil war? I happen to be one of those people who believes that China will have a civil war as their rich get richer and their middle-class inevitably connects with the rest of the world. China is still largely functionally illiterate. But my point is that a lot of things can and probably will go wrong in China. Their economy cannot sustain its current rate of growth. I think they're going to throw a piston. When that happens, watch out.

Aside from that, if we are to have a global recession, Americans will not starve. We'll just forgo some of our back-to-school and Christmas shopping, have another school shooting and buy more weed. But nobody's going to starve. If that's the total cost of kicking off a global recession that lowers the price of gasoline, I think a lot of Americans would be on board.

The other side of this though, is money that is being (or not being) sunken into the extraction of oil from shale. So is the smart money in Canada or not? That's the question, and it's tied to stuff way beyond the horizon. I think there are a number of oil bears who are having a field day as their Peak Oil Scenario is psychologically gaining traction because of woes at the pump, but oil bulls, we haven't heard from.

In the long term, I think it is much more likely that some economic or war event will affect the demand for oil long before the Peak Oil doomsday scenario plays itself out. Last month, demand for gasoline decreased 3% in the US. I sure as hell ain't gonna be driving 120 miles a day much longer.